SMH Enterprises, L.L.C. v. Krispy Krunchy Foods, L.L.C. et al
ORDER AND REASONS granting in part and denying in part 42 Motion to Dismiss for Failure to State a Claim. For the reasons stated herein, SMH's 42 motion to dismiss KKF's counterclaims and third-party claims is GRANTED IN PART and DE NIED IN PART. KKF's claims for redhibition and under § 1030(a)(4) of the CFAA are DISMISSED. As to the motion to dismiss KKF's claims for breach of contract and under § 1030(a)(2), SMHs motion is DENIED. Signed by Judge Sarah S. Vance on 4/1/2021. (mm)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
SMH ENTERPRISES, L.L.C.
KRISPY KRUNCHY FOODS, L.L.C.,
SECTION “R” (2)
ORDER AND REASONS
Before the Court is plaintiff SMH Enterprises, L.L.C. and third-party
defendant Conway Solomon’s motion1 to dismiss defendant Krispy Krunchy
Foods, L.L.C.’s (“KKF”) counterclaims and third-party claims2 under Rule
12(b)(6). KKF opposes the motion.3 For the following reasons, the Court
grants the motion in part and denies it in part.
This case arises from an alleged misappropriation of trade secrets. In
a complaint4 filed on November 2, 2020, plaintiff SMH, a software company,
alleges that it built an employee-training software platform for defendant
R. Doc. 42.
R. Doc. 23.
R. Doc. 76.
R. Doc. 1.
Krispy Krunchy Foods (“KKF”), which sells products to numerous Krispy
Krunchy Chicken fast food restaurants.5 SMH states that KKF, working with
defendants Parthenon Software Group, Inc. and Andrew Schmitt,
misappropriated information from SMH’s software and used that
information to develop its own, competing employee-training platform.6
SMH sued KKF, Parthenon, and Schmitt for alleged violations of federal and
In the complaint, SMH alleged that Solomon, one of its partners,
logged into KKF’s new platform, purportedly to “view the new system.”8
Now, KKF brings counterclaims against SMH and third-party claims against
Solomon.9 First, KKF alleges that Solomon, acting on SMH’s behalf, violated
the Computer Fraud and Abuse Act, 18 U.S.C. § 1030 (“CFAA”), when he
logged into the new KKF system.10 Second, KKF alleges that, pursuant to a
“Proposed Scope of Work” (“SOW”), SMH had contractual obligations to
deliver and maintain an effective employee-training platform.11 KKF alleges
breach of contract under Louisiana law, contending that SMH provided a
Id. at 3, ¶¶ 5-6, 5-7, ¶¶ 9-17.
Id. at 14-15, ¶¶ 29-31.
See id. at 18-29.
Id. at 14, ¶ 29.
R. Doc. 23.
Id. at 4-5, ¶¶ 17-25.
Id.at 5, ¶¶ 27-28.
defective platform, and that SMH failed to satisfy its obligation to maintain
it.12 Finally, KKF brings a claim for redhibition under Louisiana law against
SMH as manufacturer of the allegedly deficient training platform.13
Plaintiff’s motion to dismiss defendant’s counterclaim and third-party
complaint is brought under Federal Rule of Civil Procedure 12(b)(6). To
survive a Rule 12(b)(6) motion to dismiss, a party must plead enough facts
to “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544,
547 (2007)). A claim is facially plausible when the party “pleads factual
content that allows the court to draw the reasonable inference that the
[opposing party] is liable for the misconduct alleged.” Id. at 678. The Court
must accept all well-pleaded facts as true and must draw all reasonable
inferences in favor of the nonmoving party. Lormand v. U.S. Unwired, Inc.,
565 F.3d 228, 239, 244 (5th Cir. 2009). But the Court is not bound to accept
as true legal conclusions couched as factual allegations. Iqbal, 556 U.S. at
Id. at 5-6, ¶¶ 26-33.
Id. at 6-7, ¶¶ 34-40.
On a Rule 12(b)(6) motion, the Court must limit its review to the
contents of the pleadings, including attachments. Brand Coupon Network,
L.L.C. v. Catalina Mktg. Corp., 748 F.3d 631, 635 (5th Cir. 2014). The Court
may also consider documents attached to a motion to dismiss or an
opposition to that motion when the documents are referred to in the
pleadings and are central to a [party’s] claims. Id.
Computer Fraud and Abuse Act
The CFAA provides for criminal and civil liability for a violation, which
generally involves accessing a computer without authorization or in excess
of authorization, and then taking proscribed actions, such as obtaining
information, or damaging a computer or computer data.
§§ 1030(a), (g); see LVRC Holdings LLC v. Brekka, 581 F.3d 1127, 1131 (9th
Cir. 2009). To bring a civil action, a “person who suffers damage or loss by
reason of a violation of” § 1030 must show a violation of the act and one of
the following factors:
(I) loss to 1 or more persons during any 1-year period (and, for
purposes of an investigation, prosecution, or other proceeding
brought by the United States only, loss resulting from a related
course of conduct affecting 1 or more other protected computers)
aggregating at least $5,000 in value;
(II) the modification or impairment, or potential modification or
impairment, of the medical examination, diagnosis, treatment,
or care of 1 or more individuals;
(III) physical injury to any person;
(IV) a threat to public health or safety; [or]
(V) damage affecting a computer used by or for an entity of the
United States Government in furtherance of the administration
of justice, national defense, or national security . . . .
18 U.S.C. §§ 1030(c)(4)(A)(i)(I)-(V), (g). KKF alleges loss of at least $5,000,
and that Solomon and SMH violated two provisions of the CFAA:
§ 1030(a)(2) and § 1030(a)(4).
To bring a civil claim for a violation of § 1030(a)(2), KKF must allege
that SMH and Solomon (1) intentionally accessed a computer, (2) without
authorization or exceeding authorized access, and (3) the defendants thereby
obtained information, (4) from a “protected computer,” and (5) there was a
loss of at least $5,000 to one or more persons. 18 U.S.C. §§ 1030(a)(2), (g);
Brekka, 581 F.3d at 1132; Absolute Energy Sols., LLC v. Trosclair, No. 133358, 2014 WL 360503, at *2 (S.D. Tex. Feb. 3, 2014).
KKF’s allegations essentially track the required elements under
First, KKF states that “Solomon, on behalf of SMH,
intentionally accessed” KKF’s servers.14 Second, KKF alleges that Solomon
acted “without prior authorization and after [the] relationship between SMH
and KKF that would have entitled SMH or Solomon to access KKF’s servers
was terminated.”15 Third, KKF avers that Solomon “obtained information
from [the servers] regarding the KKF Platform and its appearance, as well as
the personal information of third parties . . . , and possibly other confidential
Fourth, KKF states that its servers are a
“protected computer,”17 i.e., a “computer”18 that is “used in or affecting
interstate . . . or communication.” 18 U.S.C. § 1030(e). Finally, KKF alleges
that it suffered damages in excess of $5,000 as a result of SMH’s and
Solomon’s activities, including funds it has and will expend for “additional
security measures and forensic searches to ensure that SMH has not
compromised the integrity of the KKF platform and to learn what other data
SMH may have accessed.”19
R. Doc. 23 at 4, ¶ 19.
Id.at ¶ 20.
Id. at ¶ 21-22.
The CFAA defines a “computer” as “an electronic, magnetic, optical,
electrochemical, or other high speed data processing device performing
logical, arithmetic, or storage functions, and includes any data storage
facility or communications facility directly related to or operating in
conjunction with such device . . . .” 18 U.S.C. § 1030(e)(1).
R. Doc. 23 at 5, ¶ 24.
In their motion to dismiss, SMH and Solomon primarily contest the
sufficiency of KKF’s allegations as to the second element. They argue that
KKF fails to allege that Solomon acted “without authorization” or
“exceed[ed] authorized access.”20 18 U.S.C. § 1030(a)(2). As the Fifth Circuit
has found, the term “without authorization” in the CFAA—which is not
expressly defined—has the same meaning as in the dictionary: “without
permission.” United States v. Thomas, 877 F.3d 591, 595 (5th Cir. 2017)
(citing Brekka, 581 F.3d at 1133). The CFAA defines “exceeds authorized
access” as “access[ing] a computer with authorization and [using] such
access to obtain or alter information in the computer that the accesser is not
entitled so to obtain or alter.” 18 U.S.C. § 1030(e)(6). In United States v.
Nosal, 676 F.3d 854, 858 (9th Cir. 2012), the Ninth Circuit interpreted the
term “without authorization” to apply to “outside hackers (individuals who
have no authorized access to the computer at all”). In contrast, according to
the Ninth Circuit, “exceeds authorized access” applies to “inside hackers
(individuals whose initial access to a computer is authorized but who access
unauthorized information or files”). Id.
R. Doc. 42-1 at 7-10.
Here, KKF alleges that Solomon had no authorization at all.21 Solomon
and SMH argue that Solomon used still-valid login credentials, and because
KKF has not alleged that it revoked those credentials, they contend that KKF
fails to plead that Solomon lacked authorization.22
The Ninth Circuit dealt with a similar situation in LVRC Holdings LLC
v. Brekka, 581 F.3d at 1127, a decision relied on by numerous courts,
including the Fifth Circuit in Thomas, 877 F.3d at 595, in interpreting the
CFAA. In Brekka, the Ninth Circuit noted that “a person uses a computer
‘without authorization’ under [the CFAA] when the [entity entitled to give
authorization] has rescinded permission to access the computer and the
[person] uses the computer anyway.” 581 F.3d at 1135. In Brekka, plaintiff
LVRC sued its former employee, Christopher Brekka, for violations of the
CFAA. Id. at 1129-30. While Brekka was working for LVRC, the company
gave Brekka login credentials to its website. Id. LVRC contended that, while
still employed with LVRC, Brekka violated the CFAA by using his credentials
to access sensitive information, download it, and email it to himself on an
external account. Id. at 1132-35. Additionally, LVRC alleged that Brekka
R. Doc. 23 at ¶ 19.
R. Doc. 42-1 at 7-9.
violated the CFAA after the employment relationship had terminated by
using his login credential to access its information. Id. at 1136-37.
The Ninth Circuit rejected the first argument, finding that Brekka “had
permission to access the computer,” when he used his valid credentials as an
employee of LVRC to access sensitive information. Id. at 1133. As to the
second argument, the Ninth Circuit noted that “[t]here is no dispute that if
Brekka had accessed LVRC’s information . . . after he left the company . . .
[he] would have accessed a protected computer ‘without authorization’ for
the purposes of the CFAA.” Id. at 1136. Nevertheless, the Ninth Circuit
affirmed summary judgment for Brekka because LVRC did not introduce
sufficient evidence to create an issue of material fact on the question of
whether it was Brekka who had used his credentials to log in to LVRC’s
system. Id. at 1137.
Here, KKF alleges it terminated the relationship with SMH in
November 2019.23 It also alleges that Solomon accessed KKF’s servers after
the relationship ended.24 KKF further alleges the termination ended any
authorization to access its servers that would have arisen by virtue of the
former relationship between the companies.25 The Court finds that KKF has
R. Doc. 23 at 3, ¶ 14.
Id. at 4, ¶ 19.
Id. at ¶ 16.
adequately alleged that Solomon and SMH accessed its servers “without
authorization.” Cf. Brekka, 581 F.3d at 1136.
Additionally, Solomon and SMH argue that KKF fails to allege that its
losses exceed the $5,000 threshold.26
The CFAA defines loss as “any
reasonable cost to any victim, including the cost of responding to an offense,
conducting a damage assessment, and restoring the data, program, system,
or information to its condition prior to the offense, and any revenue lost, cost
incurred, or other consequential damages incurred because of interruption
of service.” 18 U.S.C. § 1030(e)(11). This definition includes two types of
loss: (1) the direct costs of responding to a violation of the CFAA, and
(2) consequential damages resulting from interruption of service.
Complete Logistical Servs., LLC v. Rulh, 350 F. Supp. 3d 512, 522 (E.D. La.
2018) (collecting cases). Here, KKF has plausibly alleged that it incurred
over $5,000 in costs in responding to Solomon’s allegedly unauthorized
access—the first type of loss under § 1030(e)(11). Specifically, KKF states
that it suffered damages exceeding $5,000 in “additional security measures
and forensic searches to ensure that SMH has not compromised the integrity
R. Doc. 42-1 at 9-10.
of the KKF Platform and to learn what other data SMH may have accessed.”27
Because the Court finds that KKF has sufficiently pleaded that Solomon and
SMH accessed its servers without authorization and incurred losses over
$5,000, and because KKF sufficiently alleges the remaining elements under
§ 1030(a)(2), the Court denies the motion to dismiss these claims.
Under § 1030(a)(4), KKF must plead that Solomon and SMH
(1) accessed a “protected computer,” (2) without authorization or exceeding
such authorization that was granted, (3) “knowingly” and with “intent to
defraud,” (4) thereby furthering the intended fraud and obtaining anything
of value, and (5) causing a loss to one or more persons during any one-year
period aggregating at least $5,000 in value. 18 U.S.C. §§ 1030(a)(4), (g);
Brekka, 581 F.3d at 1132; Absolute Energy Sols., LLC, 2014 WL 360503, at
Claims under § 1030(a)(2) and § 1030(a)(4) are similar, and plaintiffs
that allege violations of the CFAA often sue under both provisions. The
Tenth Circuit, in United States v. Willis, 476 F.3d 1121, 1126 (10th Cir. 2007),
noted two main differences between the pertinent subsections.
subsection (a)(4), unlike (a)(2), requires “that a person act with the specific
Id. at 5, ¶ 24.
intent to defraud.” Id. Second, a person violates subsection (a)(2) by merely
obtaining “information,” while (a)(4) requires that the person obtain
“anything of value.” Id.
Additionally, criminal violations of (a)(2) and (a)(4) are punished
differently. Id. A person who violates subsection (a)(2) is subject to a
maximum of one year in prison unless, for example, the value of the
information obtained exceeds $5,000, in which case he or she is subject to
up to five years’ imprisonment. 18 U.S.C. § 1030(c)(2). In contrast, a person
who violates subsection (a)(4) by obtaining anything of value28—regardless
of its value—is subject to five years’ imprisonment. 18 U.S.C. § 1030(c)(3).
Thus, “if a person knowingly and with the intent to defraud accesses a
protected computer and by means of such conduct furthers the intended
fraud and obtains information valued at only $1,000, for example, he would
nevertheless be subject to the stricter penalty provided for under
§ 1030(c)(3).” Willis, 467 F.3d at 1126.
A person does not violate § 1030(a)(4) when “the object of the fraud
and the thing obtained consists only of the use of the computer and the value
of such use is not more than $5,000 in any 1-year period.” 18 U.S.C.
As a general matter, the Fifth Circuit holds that Rule 9(b) applies to
claims involving allegations of fraud. Williams v. WMX Techs., Inc., 112 F.3d
175, 177 (5th Cir. 1997). Rule 9(b) provides that “[i]n alleging fraud or
mistake, a party must state with particularity the circumstances constituting
fraud or mistake.” Fed. R. Civ. P. 9(b).29 But “[m]alice, intent, knowledge,
and other conditions of a person’s mind may be alleged generally.” Id.
The Fifth Circuit has held that Rule 9(b) applies to claims of state fraud,
federal securities fraud, and RICO claims based on predicate offenses of mail
or wire fraud. Williams, 112 F.3d 175, 177 (state fraud); Tuchman v. DSC
Communications Corp., 14 F.3d 1061, 1068 (5th Cir. 1994) (securities fraud);
Tel–Phonic Serv., Inc. v. TBS Int’l, Inc., 975 F.2d 1134, 1139 (5th Cir. 1992)
(RICO). In those contexts, to satisfy Rule 9(b), a plaintiff must allege the
“time, place[,] and contents of the false representations, as well as the
identity of the person making the misrepresentation and what [that person]
obtained thereby.” Williams, 112 F.3d at 177. But, the Fifth Circuit has noted
that “Rule 9(b)’s ultimate meaning is context-specific, and thus there is no
single construction of Rule 9(b) that applies in all contexts.” U.S. ex rel.
In contrast, the general rule, Federal Rule of Civil Procedure 8(a),
requires only “a short and plain statement of the claim showing that the
pleader is entitled to relief.”
Grubbs v. Kanneganti, 565 F.3d 180, 188 (5th Cir. 2009) (internal quotation
marks and citation omitted) (applying a “flexible” construction to claims
under the False Claims Act).
Neither the Fifth Circuit nor any other circuit court has addressed
whether Rule 9(b) applies to civil claims under § 1030(a)(4). The district
courts that have considered the question are split on whether Rule 9(b)’s
heightened pleading standard applies. For example, in Motorola, Inc. v.
Lemko Corp., 609 F. Supp. 2d 760, 765 (N.D. Ill. 2009), and Oracle America,
Inc. v. Service Key, LLC, No. 12-790, 2012 WL 6019580, at *6 (N.D. Cal. Dec.
3, 2012), the courts held that Rule 9(b) does not apply to the scienter element
of § 1030(a)(4), but it “plainly” applies to the requirement that “the
defendant’s acts further the intended fraud.” Other courts, including the
court in Oracle America, Inc. v. TERiX Computer Co., No. 13-03385, 2014
WL 31344, at *3-4 & n.26 (N.D. Cal. Jan. 3, 2014) (collecting cases), have
held that Rule 9(b) does not apply to § 1030(a)(4) claims.
On its face, Rule 9(b) applies when a plaintiff alleges “fraud or
mistake.” Fed. R. Civ. P. 9(b). The required elements of a claim under
§ 1030(a)(4) include the “intent to defraud” and that the defendant’s
“conduct furthers the intended fraud.” 18 U.S.C. § 1030(a)(4). By its plain
language, Rule 9(b) applies to this claim.
Additionally, courts have
interpreted the relevant elements of the CFAA according to precedent on
mail fraud, See United States v. Czubinski, 106 F.3d 1069, 1074-75, 1078-79
(1st Cir. 1997), a type of claim for which the Fifth Circuit has held that Rule
9(b) applies. Tel–Phonic Serv., Inc., 975 F.2d at 1139. Because KKF’s
§ 1030(a)(4) claim involves allegations of fraud, the Court finds that Rule
9(b)’s heightened pleading standard applies.
Knowingly and with intent to defraud
Under either the Rule 9(b) standard, or the lower Rule 8(a) standard,
KKF has failed to sufficiently allege that Solomon acted “knowingly and with
intent to defraud.” 18 U.S.C. § 1030(a)(4). “Fraud” under the CFAA has been
interpreted to mean “simply . . . wrongdoing” and does not require “proof of
the common law elements of fraud.” Shurgard Storage Centers, Inc. v.
Safeguard Self Storage, Inc., 119 F. Supp. 2d 1121, 1126 (W.D. Wash. 2000).
More specifically, “defraud” under the CFAA means “wronging one in his
property rights by dishonest methods or schemes.” Id.
This interpretation of “defraud” is based on the U.S. Supreme Court’s
decision in McNally v. United States, 483 U.S. 350, 358 (1987), in which the
Court discussed mail fraud under 18 U.S.C. § 1341. In McNally, the Court
noted that “‘to defraud’ commonly refer[s] ‘to wronging one in his property
rights by dishonest methods or schemes,’ and usually signif[ies] the
deprivation of something of value by trick, deceit, chicane or overreaching.”
The First Circuit in United States v. Czubinski, 106 F.3d 1069, 1079 (1st
Cir. 1997), applied the same interpretation of “defraud” to the CFAA. In
Czubinski, which involved criminal charges under the CFAA, an IRS agent
was convicted by a jury on four counts of wire fraud under 18 U.S.C. §§ 1343,
1346 and computer fraud under § 1030(a)(4). The defendant had made
numerous unauthorized searches in government databases to obtain tax
return information on “friends, acquaintances, and personal rivals.” Id. at
1071-72; 1078. The First Circuit reversed the defendant’s convictions on the
mail fraud and computer fraud counts, finding that the defendant “ha[d] not
obtained valuable information in furtherance of a fraudulent scheme” under
§ 1030(a)(4) “for the same reasons” that it determined that defendant had
not “deprived the IRS of its property,” for the purposes of the Government’s
wire fraud charges. Id. at 1079. Specifically, the court found that defendant
had engaged in “unauthorized browsing,” which “even if done with the intent
to deceive,” is not a “‘deprivation’ within the meaning of the federal fraud
statutes.” Id. at 1075. To be a deprivation, “some articulable harm must
befall the holder of the information as a result of the defendant’s activities,
or some gainful use must be intended by the person accessing the
information, whether or not this use is profitable in the economic sense.” Id.
Applying this interpretation, courts have found that a plaintiff states a
claim under § 1030(a)(4) when it alleges that “the defendant participated in
dishonest methods to obtain the plaintiff’s secret information.” Shurgard
Storage Centers, Inc., 119 F. Supp. 2d at 1126.
Here, KKF does not allege, even generally, that Solomon had the
requisite intent to defraud or that his unauthorized access was done
“knowingly.” Although KKF states that Solomon “intentionally accessed
KKF’s protected computer” without authorization, the counterclaim contains
no allegation that Solomon knew that he had no right of access or that he
intended to deprive KKF of anything or harm it in any way.30 At most, similar
to the “unauthorized browsing” at issue in Czubinski, KKF alleges that
Solomon accessed KKF’s servers with the intent to obtain information. 106
F.3d at 1075. Accordingly, under either the heightened Rule 9(b) standard
or the ordinary Rule 8(a) standard, the Court finds that KKF has failed to
allege that Solomon acted with “knowledge” and “intent to defraud.” The
Court must dismiss KKF’s claims under § 1030(a)(4).
R. Doc. 23 at 4.
Breach of Contract
KKF’s second claim is for breach of contract against SMH under
Louisiana law. In Louisiana, “[t]he essential elements of a breach of contract
claim are (1) the obligor’s undertaking of an obligation to perform, (2) the
obligor failed to perform the obligation (the breach), and (3) the failure to
perform resulted in damages to the obligee.” Favrot v. Favrot, 68 So. 3d
1099, 1108-09 (La. App. 4 Cir. 2011).
KKF alleges that the parties entered into a “Scope of Work” (“SOW”),
dated August 6, 2015, and allegedly signed on August 8, 2015.31 KKF points
to two provisions of the SOW, under which SMH allegedly undertook the
obligation to (1) “develop an effective and secure video training experience
for a global workforce,” and (2) “be a full-service partner that provides
ongoing maintenance and monitoring to ensure that stores are receiving high
quality training.”32 KKF further alleges that SMH breached these obligations
by providing a defective training platform, and failing to reliably remedy the
Finally, KKF alleges that it suffered damages—
including the cost of purchasing the defective training platform, paying SMH
for undelivered maintenance on the training system, costs associated with
R. Doc. 23 at ¶ 27.
Id. at ¶ 28.
Id. at 5-6, ¶¶ 29, 32
paying a third-party for maintenance, and the costs of hiring a third-party to
create a new training platform.34
In its motion to dismiss, SMH does not contend that KKF failed to
allege the elements of a breach of contract claim. Rather, it asserts an
affirmative defense: that KKF’s sole remedy under the terms of the parties’
agreement was termination, and that KKF exercised that remedy.
Safeway Transit LLC v. Disc. Party Bus, Inc., 954 F.3d 1171, 1182 (8th Cir.
2020) (“An ‘affirmative defense’ is ‘[a] defendant’s assertion of facts and
arguments that, if true, will defeat the plaintiff’s or prosecution’s claim, even
if all the allegations in the complaint are true.’” (quoting Defense, Black’s
Law Dictionary (11th ed. 2019)). In support, SMH points to an attachment
to the SOW, the “Spectrum Interactive White Label Solutions Terms and
Conditions” (“Terms and Conditions”).35
Id. at 6, ¶ 33.
KKF argues that SMH’s reliance on the Terms and Conditions is
inappropriate under Rule 12(b)(6) because, in its view, the document is not
part of the pleadings. R. Doc. 76 at 7-8. The Court may consider documents
attached to a motion to dismiss or an opposition to that motion when the
documents are referred to in the operative pleading and are central to a
party’s claims. Brand Coupon Network, L.L.C., 748 F.3d at 635. Here, KKF
refers to the “contract” between the parties in its counterclaim but relies only
on the proposed SOW. R. Doc. 23 at 5-6, ¶¶ 26-33. The Terms and
Conditions state that they constitute the agreement between the parties that
governs work under the SOW. R. Doc. 3-2 at 7. The Terms and Conditions
and SOW thus are the entire agreement, and the “contract” referred to in the
counterclaim includes the Terms and Conditions. Further, the Terms and
The Court may dismiss a claim under Rule 12(b)(6) “if a successful
affirmative defense appears clearly on the face of the pleadings.” Clark v.
Amoco Prod. Co., 794 F.2d 967, 970 (5th Cir. 1986) (emphasis added). For
example, in Miller v. BAC Home Loans Servicing, Inc., 726 F.3d 717, 725-26
(5th Cir. 2013), the Fifth Circuit found a promissory estoppel claim properly
dismissed under Rule 12(b)(6) when the defendants raised an affirmative
defense under Texas’s statute of frauds. The court noted that, under Texas
law, all agreements pertaining to loans over $50,000, including
modifications, must be written. Id.at 726. Because plaintiff’s complaint
Conditions were attached to plaintiff’s motion for a temporary restraining
order and preliminary injunction, R. Doc. 3-2, and plaintiff incorporates the
document by reference to its opposition motion citing to the appropriate
location in the record in its motion to dismiss. R. Doc. 42-1 at 2.
Additionally, in the complaint, SMH describes the Terms and Conditions as
the “Contract” and relies on it for its claim of bad faith breach of contract. R.
Doc. 1 at 8, 19 ¶¶ 20, 34-38.
The Court finds that the document is central to the parties’ claims. See
Venture Assocs. Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 432 (7th Cir.
1993) (finding that a letter of intent and related letters were “central” to a
party’s claim because “they constitute[d] the core of the parties’ contractual
relationship.”). Additionally, the Court notes that neither party has disputed
the authenticity or contents of the document. The Court finds that the Terms
and Conditions are part of the pleadings, and the Court may consider them
in determining whether dismissal is appropriate under Rule 12(b)(6). See In
re Katrina Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir. 2007)
(“[B]ecause the defendants attached the contracts to their motions to
dismiss, the contracts were referred to in the complaints, and the contracts
are central to the plaintiffs’ claims, we may consider the terms of the
contracts in assessing the motions to dismiss.”).
alleged that the parties’ agreement was entirely oral, and otherwise failed to
allege that the agreement comported with Texas’s statute of frauds, the Fifth
Circuit in Miller found that the district court appropriately considered the
statute of frauds defense when it dismissed the claim under Rule 12(b)(6).
In contrast, in Clark, a case involving a dispute over mineral rights, the
Fifth Circuit found that the district court erred by dismissing under Rule
12(b)(6) based on the “presumed lost deed” defense. 794 F.2d at 970-71.
Under that doctrine, a party in possession of property is presumed to hold a
deed to the property upon proving three elements: “(1) a long asserted and
open claim, adverse to that of the apparent owner; (2) a nonclaim by the
apparent owner; and (3) acquiescence by the apparent owner in the adverse
claim.” Id. The Fifth Circuit stated that dismissal would be appropriate if
“each element of the doctrine [were] established through the pleadings,” but
found that the complaint did not “state or permit the inference” that the
owner had not made claims, or that the owner acquiesced in the adverse
claim. Id. at 971.
Here, SMH argues that KKF’s sole remedy for breach of contract is
termination.36 But this defense does not appear “clearly” on the face of the
R. Doc. 42-1 at 2, 10-11.
document that SMH relies on, the Terms and Conditions. Section 7 of the
Terms and Conditions, titled “Termination,” provides that either party may
terminate the agreement with 30 days’ written notice, but it contains no
indication that termination is a party’s sole remedy for a breach.37 In Section
2, the Terms and Conditions state that “termination of [the parties’]
Agreement will be without prejudice to any other right or remedy of either
party.”38 By noting that termination will not prejudice any other right or
remedy, the document recognizes the potential for rights other than
Indeed, the Terms and Conditions expressly recognize a
procedure for “dispute[s] or alleged breache[s]” in addition to termination.39
SMH does not address these provisions. Rather, it relies on two clauses
in the Terms and Conditions, arguing that KKF effectively waived its claim
for breach of contract by failing to notify SMH of any deficiencies in the
training platform, and by allowing Parthenon’s access to the software.40
First, SMH points to Section 3, titled “Acceptance,” which states:
[KKF] shall accept and pay for Deliverables which conform to the
requirements of the Scope of Work. [KKF] will notify [SMH] of
any nonconformance of the Deliverables with such requirements
(“Non-conformance”) within ten (10) days of the receipt of the
Deliverables, and [SMH] shall have thirty (30) days, based on the
R. Doc.3-2 at 10, § 7.
R. Doc. 3-2 at 8, § 2 (emphasis added).
Id. at 10, § 7.
R. Doc. 42-1 at 10-11.
severity and complexity of the Non-conformance, to correct the
Non-conformance. If [KKF] uses the Deliverables before
acceptance, fails to promptly notify [SMH] of any Nonconformance, or unreasonably delays the beginning of
acceptance testing, then the Deliverables shall be considered
accepted by [KKF].41
SMH contends that KKF never gave the required notice of nonconformance,
and thereby waived any claims regarding alleged deficiencies of the training
platform.42 But even if KKF accepted the platform pursuant to the Terms
and Conditions, the terms do not speak to the effect of that acceptance, or
state that KKF is precluded from bringing a breach of contract claim for
alleged defects in the training platform.
The second provision that plaintiff points to, a clause in the “[g]eneral”
section of the Terms and Conditions, provides as follows:
To the extent that the Deliverables are integrated with any third
party services, including social media services (e.g. Facebook,
Twitter, Instagram, Tumblr, SnapChat, YouTube, etc.), as
between [KKF] and [SMH], [KKF] is solely responsible for
ensuring that its use of those third party services is in compliance
with any applicable terms and conditions, guidelines, and
privacy policies of such third party services. [SMH] is not liable
for [KKF’s] actions or non-actions or the use of third parties of
any Deliverable through such third party services, terms,
conditions, or policies.43
R. Doc. 3-2 at 9, § 3.
R. Doc. 42-1 at 11.
R. Doc. 3-2 at 11, § 9.
SMH does not adequately explain how this clause, which limits SMH’s
responsibility when the platform is integrated with a third-party service,
applies to KKF’s breach-of-contract claim.
Instead, plaintiff makes an
inapposite argument that “[b]ecause KKF accepted the Spectrum Engine as
provided by SMH and attempted to integrate it into the KKF Platform that
was administered by Parthenon, it took responsibility to ensure that
Parthenon was managing the software properly.”44 But KKF is not seeking
to hold SMH liable for deficiencies in KKF’s platform, or for its own actions
regarding the use of third-party services—which the cited provision may
apply to. Instead, KKF is seeking to hold SMH liable for deficiencies in and
failure to maintain the Spectrum Engine during the period that KKF used
SMH’s product. The provision related to third-party services is, on its face,
inapplicable to KKF’s claim for breach of contract.
The Court finds that SMH’s affirmative defense to KKF’s breach of
contract claim does not appear on the face of the pleadings. Because SMH
raises no other basis for the requested relief, and because the Court finds that
KKF has stated a plausible claim for breach of contract, the Court denies the
motion to dismiss as to this claim.
R. Doc. 42-1 at 11.
Under the Louisiana law of redhibition, a “seller warrants the buyer
against redhibitory defects, or vices, in the thing sold.” La. Civ. Code art.
2520. A plaintiff suing in redhibition must prove that “(1) the thing sold is
absolutely useless for its intended purposes[,] or that its use is so
inconvenient that it must be supposed that he would not have bought it had
he known of the defect; (2) that the defect existed at the time he purchased
the thing, but was neither known [n]or apparent to him; [and] (3) that the
seller was given the opportunity to repair the defect.” Alston v. Fleetwood
Motor Homes of Ind., 480 F.3d 695, 699 (5th Cir. 2007) (citing Dalme v.
Blockers Mfd. Homes, Inc., 779 So. 2d 1014, 1028 (La. App. 3 Cir. 2001)).
KKF pleads each of these elements in its counterclaims.45
But redhibition does not apply when there is no contract of sale. See
Alvis v. CIT Grp./Equip. Fin., Inc., 918 So. 2d 1177, 1183-84 (La. App. 3 Cir.
2005) (“[A] redhibition cause of action relates to error in the cause of
completed sales and, absent a sale, the redhibition articles do not apply.”);
Hillard v. United States, No. 06-2576, 2007 WL 647292, at *4-5 (E.D. La.
Feb. 28, 2007) (granting motion to dismiss redhibition claim because no sale
R. Doc. 23 at 35-40.
A contract of sale is “a contract whereby a person transfers ownership
of a thing to another for a price in money.” La. Civ. Code art. 2439 (emphasis
added). There is no indication in the complaint, counterclaims, SOW, or
Terms and Conditions that SMH transferred ownership of its training
platform to KKF. Rather, SMH licensed the use of its software, which
expressly “remain[ed] the exclusive property of [SMH],” under the Terms
and Conditions.46 Because the parties’ agreement does not provide for a
transfer of ownership of a thing, it is not a sale, La. Civ. Code art. 2439, and
redhibition is inapplicable. Alvis, 918 So. 2d at 1183-84. Accordingly, the
Court finds that KKF has failed to state a claim for redhibition, and the Court
must dismiss this claim.
Solomon’s Personal Liability
In its third-party claims against Solomon, KKF alleges that Solomon
violated the CFAA in his personal capacity.47 Counterclaim defendants move
to dismiss these claims, arguing that Solomon is protected from personal
liability for actions that he took on behalf of SMH.48
The Fifth Circuit has not explicitly addressed a corporate officer’s
liability under the CFAA, but it recognizes that an individual officer may be
R. Doc. 3-2 at 7.
R. Doc. 23 at 4, ¶¶ 18-20, 23-24.
R. Doc. 42-1 at 13-15.
held liable for violations of federal statutes even though they were committed
on behalf of his or her corporation. For example, in the context of trademark
infringement, the Fifth Circuit stated:
Appellees seem to support [their] position on the ground that to
hold the individuals liable for the actions of the corporation
would require a ‘piercing of the corporate veil.’ In point of fact
appellees have the cart before the horse. There can be no doubt
but that a trademark, like a patent, can be infringed by an
individual. It is infringed when an individual performs the act
or does the things that the patent or trademark law protects
against. The fact that the persons thus acting are acting for a
corporation also, of course, may make the corporation liable
under the doctrine of respondeat superior. It does not relieve the
individuals of their responsibility.
Mead Johnson & Co. v. Baby’s Formula Serv., Inc., 402 F.2d 19, 23 (5th Cir.
1968) (emphasis added); see also Engineering Dynamics, Inc. v. Structural
Software, 26 F.3d 1335, 1349-50 (5th Cir. 1994). On the other hand, if a
corporation violates a federal statute, its officers will not be personally liable
solely because of their role as officers. See United States v. Sexton Cove
Estates, Inc., 526 F.2d 1293, 1300 (5th Cir. 1976).
Similarly, under a “well settled” rule of tort law, “when corporate
officers directly participate in or authorize the commission of a wrongful act,
even if the act is done on behalf of the corporation, they may be personally
liable.” General Motors Acceptance Corp. v. Bates, 954 F.2d 1081, 1085 (5th
Cir. 1992). Under this rule, “the officer to be held personally liable must have
some direct, personal participation in the tort, as where the defendant was
the ‘guiding spirit’ behind the wrongful conduct . . . or [was] the ‘central
figure’ in the challenged corporate activity.” Mozingo v. Correct Mfg., 752
F.2d 168, 174 (5th Cir. 1985) (citing Escude Cruz v. Ortho Pharmaceutical
Corp., 619 F.2d 902, 907 (1st Cir.1980)).
The Ninth Circuit has expressly held that a corporate officer may be
personally liable for a violation of the CFAA, even when “he acted as an agent
of the corporation and not on his own behalf.” Facebook, Inc. v. Power
Ventures, Inc., 844 F.3d 1058, 1069 (9th Cir. 2016). In Facebook, the Ninth
Circuit applied the tort law rule to a claim under the CFAA, finding that a
corporate officer may be personally liable when he or she “was the ‘guiding
spirit’ behind the wrongful conduct, or the ‘central figure’ in the challenged
corporate activity.” 844 F.3d at 1069. Based on the foregoing caselaw, the
Court finds that a corporate officer may be personally liable for violations of
the CFAA even though he or she was acting on behalf of the corporate
Here, KKF alleges that Solomon personally participated in the alleged
violation of the CFAA. KKF states that Solomon “intentionally accessed
KKF’s protected computer,” “obtained information from them,” and
provided that information to SMH.49 In short, KKF has alleged that Solomon
had “direct, personal participation in the” alleged violation of the CFAA.
Mozingo, 752 F.2d at 174; Facebook, 844 F.3d at 1069. Because KKF alleges
that Solomon took these actions, the Court finds that KKF has sufficiently
pleaded that he was the “guiding spirit” or “central figure” in the alleged
violation. Id. Accordingly, the Court may not dismiss the claims against
Solomon on the ground that he acted on SMH’s behalf.
For the foregoing reasons, SMH’s motion to dismiss KKF’s
counterclaims and third-party claims is GRANTED IN PART and DENIED
IN PART. KKF’s claims for redhibition and under § 1030(a)(4) of the CFAA
are DISMISSED. As to the motion to dismiss KKF’s claims for breach of
contract and under § 1030(a)(2), SMH’s motion is DENIED.
New Orleans, Louisiana, this _____ day of April, 2021.
SARAH S. VANCE
UNITED STATES DISTRICT JUDGE
R. Doc. 23 at 18-20.
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